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Sharing ambiguous risks

Surajeet Chakravarty and David Kelsey

Journal of Mathematical Economics, 2015, vol. 56, issue C, 1-8

Abstract: We analyse risk-sharing when individuals perceive ambiguity about future events. The main departure from previous work is that different individuals perceive ambiguity differently. We show that individuals fail to share risks for extreme events. This may provide an explanation why we do not observe individuals buying insurance for certain events like hurricanes or earthquakes and why many contracts contain an “act of God” clause, which allows non-performance if an unforeseen event occurs.

Keywords: Ambiguity; Risk-sharing; Choquet expected utility; Act of God (search for similar items in EconPapers)
Date: 2015
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